Archive for the ‘Related Civil Litigation’ Category

Friday Roundup

Friday, August 16th, 2013

Wal-Mart’s FCPA expenes continue to grow, scrutiny alerts and updates, in the blink of an eye, and for the reading stack.  It’s all here in the Friday roundup.

Wal-Mart’s FCPA Expenses

As highlighted in this previous post, last FY Wal-Mart’s FCPA professional fees and expenses were approximately $604,000 per working day.  As highlighted in this previous post, for Q1 of this FY Wal-Mart’s FCPA professional fees and expenses were approximately $1.16 million per working day.

Yesterday, in a Q2 earnings conference call, Wal-Mart executives stated:

“Expenses related to FCPA and compliance matters were approximately $82 million, which was above our forecasted range of $65 to $70 million. Approximately $48 million of these expenses represented costs incurred for the ongoing inquiries and investigations. Approximately $34 million is related to global compliance programs and organizational enhancements.”

Doing the math, Wal-Mart’s second quarter FCPA-related professional fees and expenses equal approximately $1.26 million per working day.

In this release, Wal-Mart stated:

“We believe expenses for FCPA matters and compliance programs will be between $75 and $80 million for both the third and fourth quarters.”

The question again ought to be asked – does it really need to cost this much or has FCPA scrutiny turned into a boondoggle for many involved?  For more on this issue, see my article “Big, Bold, and Bizarre: The Foreign Corrupt Practices Act Enters a New Era.

Scrutiny Alerts and Updates

BHP Billiton

The company issued the following release.

“As previously disclosed BHP Billiton received a request for information in August 2009 from the US Securities and Exchange Commission (SEC). As a result the Group commenced an internal investigation and disclosed to relevant authorities including the U.S. Department of Justice (DOJ) evidence that it uncovered regarding possible violations of applicable anti-corruption laws involving interactions with foreign government officials. As has been publicly reported, the Australian Federal Police has indicated that it has commenced an investigation. The Group is fully cooperating with the relevant authorities as it has since the US investigations commenced. As a part of the US process, the SEC and DOJ have recently notified the Group of the issues they consider could form the basis of enforcement actions and discussions are continuing. The issues relate primarily to matters in connection with previously terminated exploration and development efforts, as well as hospitality provided as part of the Company’s sponsorship of the 2008 Beijing Olympics. In light of the continuing nature of the investigations it is not appropriate at this stage for BHP Billiton to comment further or to predict outcomes. BHP Billiton is fully committed to operating with integrity and the Group’s policies specifically prohibit engaging in unethical conduct. BHP Billiton has what it considers to be a world class anti-corruption compliance program.”

For more, see here from The Australian.

Novartis

Add Novartis to the list of pharma companies under scrutiny by Chinese law enforcement for business practices in China.  This Wall Street Journal article states:

“Novartis AG has opened an investigation into possible misconduct at its Chinese operations after a former employee filed a complaint about the Swiss pharmaceutical company’s business practices with labor authorities in China.  Basel-Switzerland based Novartis said … its Business Practices Office, which looks into reported misconduct, is in charge of the investigation. The company said the former employee had asked for 5 million yuan (approximately $800,000) in compensation after resigning but declined to comment further.”

Allied Defense Group

Allied Defense Group (“ADG”) employed Mark Frederick Morales, one of the individuals charged in the failed Africa Sting enforcement action.  As noted in this previous post, in August 2012, the ADG disclosed:

“In February and March, 2012, the DOJ dismissed charges against all individuals indicted in the FCPA sting operation, including the former employee of MECAR USA [an operating business of ADG]. Since this time, the Company’s FCPA counsel has had several discussions with the DOJ and SEC regarding the agencies’ respective inquiries. Based upon these discussions, it appears likely that resolution of these inquiries will involve a payment by the Company to at least one of these government agencies in connection with at least one transaction involving the former employee of Mecar USA. At this point, the amount of this payment is undeterminable.”

ADG recently disclosed:

“In late 2012, the SEC advised that it will not pursue an enforcement action against the Company and in early August 2013, the DOJ advised that it has decided to close its inquiry into this matter.”

In The Blink Of An Eye

As highlighted last week in the Friday Roundup, last week Juniper Networks disclosed:

“The U.S. Securities and Exchange Commission and the U.S. Department of Justice are conducting investigations into possible violations by the Company of the U.S. Foreign Corrupt Practices Act. The Company is cooperating with these agencies regarding these matters. The Company is unable to predict the duration, scope or outcome of these investigations.”

Whether because of three sentences or other information in the company’s quarterly filing, the company’s stock dropped approximately 5.5% last Friday.

72 hours later?

Why of course a securities fraud class action complaint.

This beats the 100 hour threshold highlighted in this previous blink of an eye post.

Reading Stack

A revealing Op-Ed from a member of the Indian Administrative Services in the Times of India which “looks at the games lower bureaucracy plays — sometimes on its own, at other times in collusion with the top — which kill  entrepreneurship and capitalism in India” and which also provide breeding grounds in which harassment bribery flourishes.

An FCPA Mid-Year Update from BakerHostetler.

*****

A good  weekend to all.

Notable RICO Decision And Development

Tuesday, August 6th, 2013

Several FCPA enforcement actions have been brought against foreign companies based on sparse U.S. jurisdiction allegations (a required legal element for an anti-bribery violation against a foreign company).

For instance, the recent Total enforcement action (the third largest in FCPA history in terms of fine and penalty amount) was based on a 1995 wire transfer of $500,000 (representing less than 1% of the alleged bribe payments at issue) from a New York based account.

The JGC Corp. enforcement action was based on the jurisdictional theory that certain alleged bribe payments flowed through U.S. bank accounts and that co-conspirators faxed or e-mailed information into the U.S. in furtherance of the bribery scheme.

The Magyar Telekom enforcement action was based on allegations that a company executive sent two e-mails to a foreign official from his U.S. based e-mail address that passed through, was stored on, and transmitted from servers located in the U.S. and that certain electronic communications made in furtherance of the alleged bribery scheme and the concealment of payments, including drafts of certain agreements and copies of certain contracts with intermediaries, were transmitted by company employees and others through U.S. interstate commerce or stored on computer servers located in the U.S.

The Bridgestone enforcement action was based on allegations that employees sent and received e-mail and fax communications to/from the U.S. in connection with the bribery scheme.

The Tenaris enforcement action was based on allegations that a payment to an agent in connection with the alleged bribery scheme was wired through an intermediary bank located in New York.

The above enforcement actions and the jurisdictional allegations they were based on makes the recent civil RICO decision in PEMEX v. SK Engineering & Construction & Siemens all the more interesting.  As set forth in Judge Louis Stanton’s (S.D.N.Y.) opinion, PEMEX alleged that the defendants violated RICO and common law fraud by bribing PEMEX officials to approve overrun and expenses payments to CONPROCA, a Mexican corporation completing an oil refinery rehabilitation project in Mexico.

According to the complaint, CONPROCA would receive payment from PEMEX’s Project Funding Master Trust (the “Master Trust”), organized under Delaware law, and managed by its then-trustee Bank of New York.  According to the complaint, The Master Trust paid each invoiced amount from its New York account to CONPROCA’s account at Citibank in New York.

The complaint further alleged that CONPROCA financed the project at issue ”through the issuance of bonds registered with the SEC, and through institutional credit, a substantial amount of which were issued by U.S. financial institutions and guaranteed by the Export Import Bank of the United States.”

The DOJ would surely take the position that the above U.S. jurisdictional allegations would be sufficient to bring a criminal FCPA enforcement action against a foreign company for bribing foreign officials.

Not so in a civil RICO action subjected to judicial scrutiny.

In ruling on the defendants’ motion to dismiss based on the argument that the RICO claims were extraterritorial, Judge Stanton first noted that because RICO is silent as to any extraterritorial application, the RICO statutes do not apply extraterritorially.  Judge Stanton then observed that “when foreign actors were the primary operators, victims, and structure of a RICO claim” courts have properly concluded that the claims were extraterritoritial.

Judge Stanton then held that PEMEX’S RICO claims were extraterritorial because “they allege a foreign conspiracy against a foreign victim conducted by foreign defendants participating in foreign enterprises.”

As to those U.S. jurisdictional allegations, Judge Stanton stated:

“They fail to shift the weight of the fraudulent scheme away from Mexico. Seen simply, as a result of the claimed conspiracy PEMEX, the Mexican Plaintiff for whom the work was done in Mexico, paid fraudulent overcharges to CONPROCA, the Mexican corporation which did the work.  PEMEX officials in Mexico granted the challenged approvals to pay CONPROCA. The American trustee merely transferred the payments through two banks in New York.  The defendants’ bribery of PEMEX officials, and CONPROCA’s underbidding and submitting false claims under Mexican public works contracts, all occurred in Mexico. Thus, ‘it is implausible to accept that the thrust of the pattern of racketeering activity was directed at’ the United States.  The RICO claims are accordingly dismissed.”

Judge Stanton’s “thrust” reference is similar to the “sufficient force” language in Justice Alito and Justice Thomas’s concurring opinion in the Kiobel case concerning the extraterritorial application of the Alien Tort Statute.  (See here for the prior post on Kiobel including additional information concerning FCPA jurisdictional issues as to foreign companies).

In addition to the above, another interesting RICO development concerns a lawsuit recently brought by Otto Reich (a former U.S. diplomat and Ambassador to Venezuela) against individuals he accuses of bribing senior Venezuelan officials in exchange for contracts worth hundreds of millions of dollars.”  According to the lawsuit, the individuals are U.S. residents and associated with U.S.-based companies Derwick Associates USA LLC and Derwick Associates Corporation.

In pertinent part, Reich alleges as follows.

“Derwick Associates’ ‘business model’ is simple. From the United States Defendants offer multi-million dollar kickbacks to public officials in Venezuela in exchange for the award of energy-sector construction contracts. Once the contracts are secured for Derwick Associates (and the money ultimately transferred into bank accounts in New York) Defendants skim millions off the top, which they deposit in U.S. banks. Defendants then subcontract out the actual work to be performed on site to other U.S.-based companies, including one based in Missouri. Defendants run their illegal scheme from their homes and offices in New York and through their U.S.-based companies. The scheme has been a huge financial boon to Defendants … all of whom enjoy lifestyles of extreme wealth in the United States.”

It is likely that this civil RICO suit, like others before it, will spawn a DOJ FCPA investigation …  if it hasn’t already.

Defamation Claims Increase Costs Of Cooperation With Government Investigations

Monday, July 15th, 2013

A guest post today from Jeremy Byrum (McGuireWoods LLP).  The post concerns a civil defamation claim relating to Royal Dutch Shell’s 2010 FCPA enforcement action.  (See here for the prior post regarding the enforcement action).

*****

Defamation Claims Increase Costs of Cooperation with Government Investigations

Disclosing the results of a company’s internal investigation to government investigators is always fraught with potential problems.  The most obvious is the danger of waiving attorney-client privilege and work product protections that would otherwise shield the internal investigation from discovery in parallel litigation.  But another less heralded danger is the risk of defamation claims by employees identified through the investigation as having participated in illegal activity.  The risk associated with such claims was on display in a recent ruling by a Texas court of appeals, which held that Shell Oil Company was only entitled to a conditional privilege, and not “immunity,” for statements it made in a written report to the Department of Justice (DOJ) regarding alleged violations of the FCPA.

On November 4, 2010, the DOJ announced more than $236 million in civil and criminal penalties from the settlement of alleged FCPA violations in Nigeria.  The settlements followed a lengthy investigation of Panalpina Group, a Swiss logistics company, and several of its oil and gas clients, including Shell.  According to the Texas court of appeals’ decision, the DOJ first requested a meeting to discuss Shell’s business with Panalpina in July 2007.  Following that meeting, Shell agreed to conduct an internal investigation, which eventually culminated in a written report that was submitted to the DOJ in February 2009.

Following the 2010 settlements, a former employee sued Shell for defamation, claiming that Shell’s written report falsely stated that he recommended reimbursement to contractors for payments that he knew were bribes.  The trial court granted summary judgment in favor of Shell, finding that Shell had an absolute privilege (i.e., immunity) for the statements it made to the DOJ.  The Texas court of appeals reversed that finding on June 24, 2013, holding that Shell’s written report was only covered by a conditional privilege.  Consequently, Shell is not immune from suit if the former employee can show that Shell’s actions were motivated by malice.

The key legal issue in the case was whether Shell’s statements were made in the context of an ongoing or proposed judicial or quasi-judicial proceeding.  If so, then the statements would be absolutely privileged.  But the appeals court rejected Shell’s argument that the DOJ’s solicitation and the resulting internal investigation were evidence of a proposed judicial proceeding.  Likewise, the court rejected Shell’s argument that the 2010 settlement was evidence of a proposed judicial proceeding.  In the absence of direct evidence that the DOJ was contemplating a judicial proceeding in February 2009, the court rejected Shell’s absolute privilege claim.

The case is also noteworthy for the policy arguments made in the majority and dissenting opinions.  The dissent takes on the key policy issue—the potential chilling effect of the court’s ruling: “If absolute privilege is not available, a cooperating party runs the risk of defamation actions by anyone identified as having involvement in a potentially prohibited transaction.  This risk creates a disincentive for companies to conduct their own investigations, to make frank assessments of fault, and to communicate findings to DOJ.”  The majority focused on a rival policy argument, however, suggesting that absolute immunity would “discourage, rather than encourage, truth-telling” because companies have a “strong motive to deflect blame.”  The majority concluded that a conditional privilege was sufficient protection to encourage companies to cooperate with law enforcement.

The court’s ruling no doubt raises additional concerns for companies considering the already difficult decision whether to disclose the results of an internal investigation.  As the dissent notes: “A company like Shell is, in the face of a DOJ inquiry, in a quandary: it can provide inculpatory statements regarding actions taken on its behalf by its employees, recognizing that it is exposed to a defamation claim.  Or it can face criminal prosecution or penalization for a failure to comply and cooperate adequately with the DOJ’s investigation.”  But this may be less of a dilemma than the dissent imagines.  A company’s concerns about potential defamation claims ordinarily will pale in comparison to the high stakes risks associated with a criminal investigation by the DOJ.  Thus, the feared chilling effect is likely overstated.

Although the Texas court’s decision increases the potential costs of cooperating with a government investigation, it probably will not alter the level of cooperation in most cases.  In all likelihood, companies will continue to assess the appropriate level of cooperation necessary to avoid or minimize their exposure in a criminal investigation, and will simply accept the possibility of defamation claims as an unfortunate cost of doing business.

Ashland Oil – The “FCPA’s” First Repeat “Offender”

Thursday, May 23rd, 2013

[This post is part of a periodic series regarding "old" FCPA enforcement actions]

In 1986 the SEC brought this civil injunctive action against Ashland Oil, Inc. (a Kentucky based oil refining company) and its Chairman and CEO Orin Atkins for engaging in conduct in violation of the FCPA’s anti-bribery provisions.

The complaint began by noting that in 1975, prior to the passage of the FCPA, the defendants consented to final judgments of permanent injunction enjoining them from using corporate funds “for unlawful political contributions or other similar unlawful purposes.”  As noted in “The Story of the Foreign Corrupt Practices Act” Ashland Oil’s payments to Albert Bernard Bongo, the President of Gabon, were among a group of payments that drew Congressional attention to the foreign corporate payments problem and motivated Congress to pass the FCPA in 1977.

The 1986 Ashland Oil enforcement action is thus notable as the first instance of an “FCPA” repeat “offender.”

As highlighted in more detail below, the enforcement action is also notable for the following reasons:  (i) the thing of value consisted of buying a “foreign official’s” interest in a largely worthless mine); (ii) the conduct at issue lead to an FCPA-related civil suit in which two terminated company employees were awarded $70 million in damages; and (iii) there was controversy both as to the DOJ’s and SEC’s handling of the conduct at issue.

In the 1986 action, the SEC alleged that Ashland Oil and Atkins “paid $25 million in principal plus approximately $4 million in interest, and by virtue of the acquisition of an interest in Midlands Chrome [a largely worthless Zimbabwe mine owned by the "foreign official" and his family], gave something of value to James Landon [a British national seconded (detailed) to the government of Oman who served as a special adviser to the Sultan of Oman on Omani intelligence and security matters] … for the purpose of inducing Landon to use his influence with the government of Oman … in order to assist Ashland in obtaining and retaining business with the government of Oman … namely certain business related to crude oil.”

According to the complaint, Atkins was told that Midlands Chrome “could be purchased from persons who could be sympathetic to Ashland’s desire to become a purchaser of crude oil from Oman.”  Even though a company lawyer advised that the transaction raised issues under the FCPA, the SEC alleged that the “board of directors of Ashland held a meeting at which Atkins presented for the Board’s approval the acquisition of Midland Chrome.”  According to the complaint, Atkins viewed the acquisition as a “high risk project” but one that had “potential of being more than offset by a potential crude oil contract …”.  According to the complaint, initial board meeting minutes show that Atkins said “the corporation was interested [in the Midlands Chrome acquisition] for the reason that it might thereby be enabled to obtain a contract to purchase crude oil from Oman” but that “this statement was deleted from the final version of the minutes at Atkins’ direction.”

Based on the above core conduct, in a detailed 35 page complaint, the SEC alleged three substantive FCPA anti-bribery violations.

Atkins resigned as chairman of Ashland in 1981 after an internal investigation into a number of questionable foreign payments.  According to media reports, when the 1986 matter was resolved Atkins issued a statement which read as follows.  “Although it would be my personal preference to litigate this matter, I have agreed to settle this action so that the company can put this lingering dispute behind it, and because to contest this matter would have involved disproportionate trouble and expense.”  For more on the life of Orin Atkins, see here and here.

In media reports, Richard Murphy, an SEC enforcement lawyer, said the Ashland case was significant because it demonstrated that the SEC will go beyond the traditional “cash cases” and scrutinize more complicated transactions to determine if they represent violations.

In 1995, Ashland Oil changed its name to Ashland Inc.

In an interesting side note, former Ashland employees Bill McKay and Harry Williams sued the company for breach of contract and wrongful discharge, asserting that Ashland’s pattern of corrupt practices amounted to a violation of the Racketeer Influenced and Corrupt Organizations law.   McKay alleged that he was terminated because he refused to take part in any bribery schemes and that he refused in subsequent investigations to hide Ashland’s conduct from officials at the IRS and SEC.  According to a 1989 ABA Journal report, “Williams had not been asked to take part in any foreign payments, but he’d become sympathetic to McKay’s efforts to change Ashland’s policy.”  According to the report,  Williams “made an anonymous phone call to the SEC and spoke freely about Ashland’s recent actions abroad.”  A jury returned a verdict of approximately $70 million.  According to the ABA report, McKay was awarded over $44.5 million, and the rest was apportioned to Williams.  According to the report, Ashland threatened to appeal and the parties settled for $25 million.

Set forth below, in pertinent part, is an interesting article published in the Washington Post on July 10, 1988. about the DOJ’s and SEC’s handling of the conduct at issue.

“Lawyers for two former executives who won a $ 69.5 million award from Ashland Oil Co. contend that their victory shows the Securities and Exchange Commission pulled its punches in handling charges of overseas bribery and other illegal conduct by Ashland.  The two former vice presidents had said in wrongful-dismissal lawsuits and in SEC testimony that Ashland paid tens of millions of dollars in bribes to foreign officials to get scarce crude oil and then tried to cover up the illegal conduct. They said they lost their jobs after refusing to participate in conspiracies, perjury and other crimes.  Last month, a U.S. District Court jury in Covington, Ky., awarded Bill E. McKay $ 44.6 million and Harry D. Williams $ 24.9 million after a 35-day trial. The jury said the liability should be shared by Ashland; its former chairman and chief executive, Orin E. Atkins; John R. Hall, who succeeded Atkins in 1981, and Richard W. Spears, senior vice president for human resources and law.”

“The SEC filed a much narrower civil lawsuit in July 1986 charging that Ashland and Atkins had bribed an official of Oman to get oil from the sultanate. The suit was filed in tandem with a consent decree, a final court judgment in which Ashland and Atkins neither admitted nor denied past violations while agreeing to face criminal penalties for future ones.”

“The jury and the SEC each had essentially the same evidence of possible violations of the Foreign Corrupt Practices Act (FCPA) of 1977. The gap between the jury’s verdict and the SEC action shows that the SEC dealt with the matter too lightly, according to John R. McCall and Kenneth M. Robinson, the lawyers for McKay and Williams.  ‘I can understand how counsel for McKay and Williams are proud of their achievement, and they certainly have the right to crow about it,’ said SEC enforcement chief Gary G. Lynch. ‘But any criticism of the commission’s investigation, or of the results that we achieved, is simply unwarranted.’”

“Punitive damages accounted for only $ 3 million of the awards to McKay and Williams. Compensatory damages were tripled — to $66.5 million — for conspiring to violate, and for violating, the Racketeer Influenced and Corrupt Organizations Act. RICO makes it unlawful for any person associated with an enterprise affecting commerce to lead or to join in ‘conduct of [the] enterprise’s affairs through a pattern of racketeering activity.’  The jury found that the three individual defendants had all conducted or participated in ‘a pattern of racketeering activity’ principally through multiple violations of the FCPA antibribery section and of a law prohibiting travel for the purpose of violating the section.”

[...]

“The SEC’s 1986 lawsuit, which followed months of negotiations with Ashland’s law firm, Cravath, Swaine & Moore, named only one person paid by the oil company, James T.W. (Tim) Landon of Oman, as a foreign government official under the FCPA’s antibribery provisions. The complaint also alleged only one bribe, described by Ashland as a $ 25 million investment in a Landon-controlled chromium mine in Rhodesia.  But the jury found that Ashland, ‘with corrupt intent to bribe,’  had made payments to three figures it said were foreign officials under the FCPA: Landon and Yehia Omar of Oman, and Hassan Y. Yassin of Saudi Arabia (who also has operated a consulting firm in McLean).  With the same corrupt intent, the jury said, Ashland had made payments to a fourth recipient, Sadiq Attia, ‘knowing or having reason to know that’ all or a portion of the money — $ 17 million — ‘would be used to bribe a government official of Abu Dhabi.’”

“The SEC complaint and consent decree did not mention Yehia Omar or cite any Abu Dhabi and Saudi Arabia payments.  Last December, SEC Chairman David S. Ruder told Senate Banking Committee Chairman William Proxmire (D-Wis.) that the Division of Enforcement ‘concluded that the evidence was … insufficient to support further charges of violations’ of the FCPA. In an interview after the jury verdict, Lynch said ‘there was not sufficient evidence that we felt comfortable we could prevail’ if charges were brought based on Ashland payments to Omar. ‘Even before we sat down to negotiate, we had decided privately to exclude Omar, Abu Dhabi, and Saudi Arabia from the consent decree.  ‘It was clear to us that the Landon transaction was the strongest, because we believed we could establish that Landon was a government official at the time the chrome transaction occurred.’ Lynch said. He called a multiple-count complaint unnecessary.  ‘We were suing for injunctive relief,’ and ‘we could get it with Landon,’ he said. ‘There was no need to push and take on a litigation risk in a case that was much less certain.’  He extended this argument to the omission of the Abu Dhabi and Saudi Arabia cases.”

“But lawyers McCall and Robinson disagreed. ‘The finest judicial scrutiny our American judicial system can provide has now determined that the earlier government efforts were incomplete,’ McCall said. It’s ‘ridiculous’ for the SEC to claim the evidence was insufficient to convince a jury that bribery far beyond that which it alleged hadn’t occurred, he said.”

“Lynch also defended the SEC’s decision not to ask a federal court to find Ashland and Atkins had violated a 1975 consent decree and to hold them in criminal contempt.  ‘We did have a concern about meeting the higher burden of proof in order to prove criminal contempt,’ Lynch said. [...] One difficulty in going the criminal route was that ‘the major thrust’ of the 1975 decrees involved unlawful political contributions, and ‘these were foreign bribes,’ Lynch said.”

“But the lawyers for McKay and Williams dismissed this explanation. They pointed out that the 1975 consent decrees prohibited false or fictitious bookkeeping entries, and said the $ 25 million Oman item that the SEC called a bribe, as well as the Abu Dhabi and Saudi Arabia payments, all were recorded by Ashland as ordinary outlays.  ‘It was like shooting ducks in a barrel,’ Robinson said. ‘There was no answer that any Ashland official could give on the stand to explain the fraud that was in the documents that they wrote. And how the SEC could miss that is beyond description.’  ‘The SEC should have seen it. These were indictable offenses … I don’t see the evidence that the SEC even slapped Ashland’s wrist. They just closed the book by executing another consent decree — a promise to pay, which is all that it is.’”

“Arthur F. Mathews, who was an SEC deputy enforcement chief in 1969, said in an interview that ‘in the horse-trading for not litigating,’ Cravath, Swaine ’got the staff to strike Yehia Omar …  If I had to guess, they did not include Yehia Omar in their action because they thought it was a toss-up whether you could prove it, and they gave it up in the bargain.’”

“McCall said the SEC staff may well have done all it could have, particularly in light of the Reagan administration’s apparent reluctance to enforce the FCPA’s antibribery provisions.’ The SEC commissioners, for example, voted 3 to 2 to reject the division’s initial recommendation for a lawsuit that named only Landon as the recipient of a bribe. Only after the division reargued its case did the commission reverse itself, allowing Lynch to file the lawsuit.  Lynch said the SEC disregarded a report by an outside counsel who concluded that the Oman transactions had not violated the FCPA or the 1975 consent decree. Williams and McKay had challenged the independence of the outsider, Pittsburgh attorney Charles J. Queenan. Queenan is a friend of Cravath, Swaine presiding partner and Ashland director Samuel C. Butler, who submitted the report to the SEC as the work of an independent counsel.  ‘We did not accept the conclusion that it was an ‘independent counsel’ report,” Lynch said. The SEC staff ‘did our own very thorough investigation of the matter,’ he said. ‘It is clear that if we had accepted the Queenan report’s findings, we would not have filed an action.”

[...]

“Sen. Proxmire, who monitors FCPA enforcement, also has raised questions about the Justice Department’s role in the Ashland case. The department had full access to the SEC’s files from the start of the SEC staff investigation in May 1983. Last October, after a Washington Post series on Ashland’s payments to overseas consultants, Proxmire asked the department if it had investigated the matter and if ‘it has concluded that violations of the FCPA have taken place.’ If the conclusion was that there’d been no violations, ‘I would like an explanation of the rationale underlying such a judgment,’ Proxmire said. ‘If the department has not investigated these allegations, I request that you do so and let me know the results.’  Assistant Attorney General John R. Bolton said on Jan. 20 that he would respond when he received a report from the fraud section of the Criminal Division.  On June 20, Proxmire, having heard nothing more for six months, sent Attorney General Edwin Meese III a news story on the jury verdict in Kentucky and asked ‘whether the Department of Justice will now initiate a criminal action.’  If not, Proxmire said he wanted to know why. A department spokesman said a response is being prepared.”

The FCPA’s First Mega Enforcement Action

Monday, March 18th, 2013

[This post is part of a periodic series regarding "old" FCPA enforcement actions]

The year was 1982 and the Foreign Corrupt Practices Act was nearing five years old.  Up to this point, enforcement was sparse and focused on single-actor type cases.  See here, here, here, here and here for FCPA enforcement actions up to this point.

In 1982, the first FCPA mega-case was brought and it involved five corporate defendants and twelve individual defendants.

Specifically, in October 1982, the DOJ brought an indictment (here) against:

  • Crawford Enterprises Inc. (“CEI”) (a Houston based private company that sold compression equipment systems to oil and gas companies);
  • Donald Crawford (CEI’s Chairman and sole shareholder and, at certain relevant times, CEI’s President);
  • William Hall (CEI’s Executive Vice President and, at certain relevant times, CEI’s President);
  • Ricardo Beltran (President and majority shareholder of Grupo Industrial Delta, a Mexican corporation);
  • Mario Gonzalez (a U.S. citizen who assisted Grupo Delta and CEI communicate with certain alleged foreign officials);
  • Andres Garcia (a U.S. citizen who assisted Grupo Delta and CEI communicate with certain alleged foreign officials);
  • George McLean (Vice President of Solar Turbines International (“Solar”), a division of International Harvester Company);
  • Luis Uriarte (the Latin American Regional Manager of Solar);
  • Al Eyester (President of Ruston Gas Turbines “Ruston”);and
  • James Smith (Vice President of Ruston).

The indictment charged a conspiracy between the defendants and others to pay money to Mexican foreign officials and Grupo Delta “knowing that all or a portion of such money would be offered, given or promised directly or indirectly” to foreign officials for the purpose of influencing the acts and decisions of the officials “in their official capacity, and inducing them to use their influence with Pemex so as to affect and influence the acts and decisions of Pemex in order to assist” Crawford, the other defendants, and others in “obtaining or retaining business with Pemex.”

The indictment alleges that Petroleos Mexicanos (“Pemex”) was the “national oil company wholly owned by the Government of the Republic of Mexico and was responsible for the exploration and production of all of the oil and natural gas resources of Mexico and for acquiring the equipment, including compression equipment systems, necessary for such exploration and production.”

The indictment alleged that “Pemex was an instrumentality of a foreign government” and that two individuals (Ignacio de Leon and Jesus Chavarria) were “foreign officials” based on their positions of “subdirector of Pemex responsible for the purchase of goods and equipment on behalf of Pemex” and “subdirector of Pemex responsible for the exploration and production of Mexican oil and natural gas.”

[As an aside, it should be noted that in the recent “foreign official” challenges, the DOJ has argued that its charging decision in the Crawford cases as to Pemex demonstrated the validity of its position that employees of SOEs are “foreign officials” under the FCPA.  For instance, the recent FCPA Guidance states that the SEC and DOJ ‘‘have pursued cases involving instrumentalities since the time of the FCPA’s enactment’’ and that the ‘‘second-ever FCPA case charged by the DOJ’’ involved bribes to executives of the Mexican national oil company.  

However being consistently wrong, does not make one right and, as noted in my article “Grading the FCPA Guidance,” missing from the Guidance discussion or associated citations on this issue, is any reference to the fact that George McLean, the only defendant in the series of related cases to put DOJ to its burden of proof at trial, was found not guilty by the jury.]

The conspiracy charge alleged that CEI and Crawford agreed to pay and paid the “foreign officials” “bribes equalling approximately 4.5% of each Pemex purchase order for compression equipment systems in which” CEI participated and that “it was further a part of the conspiracy” that CEI and Crawford arranged with defendants Beltran, Gonzalez and Garcia that Grupo Delta would: “(a) hold itself out as the Mexican agent of CEI, while in truth acting primarily as the conduit for the bribe payments; (b) disguise the bribe payments as ‘commissions’ due by providing to CEI false and fictitious invoice for each payment received; and (c) provide Gonzalez and Garcia with a base of operations from which to perform their function as middlemen and channels of communications between the co-conspirators” and the foreign officials.”

The indictment further alleged that the defendants used the term “folks” as a code word for the “foreign officials” “in order to conceal from others their true identities as Pemex officials and the existence of the bribe scheme.”  The indictment alleged that “in order to create a pool of money with which to pay bribes” CEI along with Solar and Ruston “submitted to Pemex bids which were inflated to include a 4.5% markup for the “folks.”

The indictment alleged that CEI, along with Solar and Ruston received purchase orders from Pemex for compression equipment systems in the approximate amount of $225 million and that approximately $10 million in bribe payments were made to the “foreign officials” as part of the bribery scheme.

In addition to the conspiracy charge, the indictment also alleged approximately fifty substantive FCPA anti-bribery violations against various combinations of the defendants.  The indictment also charged CEI, Crawford and Hall with an obstruction charge based on allegations that the defendants destroyed certain documents relevant to a grand jury subpoena.

Media reports described the action as the first major criminal investigation under the FCPA.  According to the reports, in November 1982, CEI, Crawford, Hall, Garcia, McLean, Uriate, and Eyster pleaded not guilty.  Crawford and Hall stated that while commission payments were made to Grupo, no such bribes were paid to Pemex officials.

CEI released a statement which said that “despite vigorous and repeated denials by Crawford Enterprises of any wrongdoing in connection with these allegations, the investigation has continued for nearly 3.5 years.”  The company said that Pemex and the Mexican government had looked into similar charges and found no wrongdoing in the award of Pemex contracts to Crawford.  The company’s statement further indicated as follows.  “Four factors accounted for CEI’s success in becoming one of Pemex’s principal gas compression contractors:  its proven experience in the industry; its aggressive delivery schedules that other firms simply could not match; its maintenance and repair of equipment installed in Mexico; and the lower costs to Pemex as a result of all the above.”

Prior to the above-reference October 1982 indictment, in September 1982 the DOJ charged Ruston Gas Turbines Inc., C.E. Miller Corporation and Charles Miller based on the same core set of allegations.  The DOJ charged Ruston Gas Turbines in a one count criminal information (see here) with a substantive FCPA violation and the company pleaded guilty and was ordered to pay a $750,000 fine (see here).  The DOJ charged C.E. Miller Corporation and Miller (President, Chairman of the Board, and majority shareholder of the company) in a one count criminal information charging substantive FCPA violations and aiding and abetting FCPA violations. (See here).  C.E. Miller Corporation and Miller both pleaded guilty and the company was ordered to pay a $20,000 fine and placed on probation for three years (see here) and Miller was sentenced to three years probation (see here).

Prior to the above-referenced September 1982 charges, in May 1981 the DOJ charged Gary Bateman (an International Sales Manager for CEI and also Chairman of the Board, President and sole shareholder of Applied Process Products Overseas, Inc.) in a multi-count information (see here) charging various misdemeanor violations of the Currency and Foreign Transactions Reporting Act concerning the transportation of money to Mexico in connection with the bribery scheme.  Bateman pleaded guilty and agreed to pay a civil penalty of approximately $330,000.  In January 1983, the DOJ also charged Applied Process Products Overseas, Inc. in a one-count information (here) charging a substantive FCPA violation based on the same core set of allegations.  The company pleaded guilty and was ordered to pay a $5,000 fine.  (See here).

After the above-referenced October 1982 charges, in November 1982 the DOJ also filed a criminal information against International Harvester (see here).  The information was based on the same core set of allegations as set forth above and based on the conduct of its employees McLean and Uriarte.  International Harvester pleaded guilty to conspiracy to violate the FCPA (see here) and was ordered to pay a $10,000 fine and agreed to also pay $40,000 civil cost reimbursement.

The DOJ’s offer of proof in the International Harvester case (see here) contained the following statement.

“After Solar had agreed to participate and to cooperate with CEI, and pursuant to the 1977 enactment of the Foreign Corrupt Practices Act [International Harvester's long-standing Policy on Conflicts of Interest and Ethical Business Conduct] was revised and supplemented to affirm that improper payments prohibited by the Act were also prohibited as a matter of company policy.  In 1977, 1978, 1979, and 1980, through an annual audit process, each International Harvester managerial employee was required to certify his or her compliance and to report any action that might conflict with company policy for review by the Office of the General Counsel and corrective action, if warranted.  During those years, Uriarte and McLean each reported in the annual audit process that he was aware of International Harvester policy and had taken no action in violation thereof.  Insofar as each of them participated in the conspiracy described herein, he accordingly concealed from International Harvester his participation and the participation of the Solar Turbine Division.  Neither Solar employee held a position which required him to report to International Harvester management.  There has been no evidence that any officers, directors or management of International Harvester knew of or participated in the conspiracy charged.”

In January 1983, the DOJ charged Marquis King (an officer and director of C.E. Miller) in a one-count information charging a misdemeanor violation of the Currency and Foreign Transactions Reporting Act concerning the transportation of money to Mexico in connection with the bribery scheme. (See here).  King pleaded guilty and he was sentenced to 14 months probation and ordered to pay a $5,000 fine.  (See here).

In June 1985, CEI pleaded guilty to conspiracy to violate the FCPA and 46 substantive FCPA violations.  (See here).  CEI agreed to pay a $10,000 criminal fine as to the conspiracy charge and $75,000 as to each of the 46 substantive charges for a total fine amount of $3,460,000.  At the same time, the following defendants pleaded nolo contendere:  Donald Crawford, Al Eyster, James Smith, Andres Garcia, and William Hall.  Crawford pleaded nolo contendere to conspiracy to violate the FCPA and 46 substantive FCPA violations and was ordered to pay a total fine amount of $309,000 (see here); Eyster pleaded nolo contendere to conspiracy to violate the FCPA and 41 substantive FCPA violations and was ordered to pay a total fine amount of $5,000 (see here); Smith pleaded nolo contendere to conspiracy to violate the FCPA and 44 substantive FCPA violations and was ordered to pay a total fine amount of $5,000 (see here); Garcia pleaded nolo contendere to conspiracy to violate the FCPA and 46 substantive FCPA violations and was ordered to pay a total fine amount of $75,000 (see here); and Hall pleaded nolo contendere to conspiracy to violate the FCPA and 32 substantive FCPA violations and was ordered to pay a total fine amount of $150,000 (see here).

That leaves McLean and Uriarte.  Stay tuned for the rest of the story.

Of further note from this enforcement action, Pemex filed a civil suit in U.S. District Court in Houston against Crawford, CEI, the two foreign officials, and twelve others in a bid to recover monies allegedly extracted from Pemex.  In its complaint, Pemex sought several million dollars in both compensatory and punitive damages from Crawford and the other entities based upon the same conduct that was alleged in the DOJ enforcement actions.  Pemex’s suit was based upon alleged violations of the Sherman Antitrust Act,  the Robinson-Patman Act, and the Racketeering Influenced and Corrupt Organizations Act.  Pemex also asserted causes of actions based upon commercial bribery and common law fraud.  Various of the defendants in the civil action sought relevant documents from Pemex and it was ultimately held in contempt for not producing the documents.  For additional background on this case, see 643 F.Supp. 370; 826 F.2d 392.